Shoppers could be in for a treat this Christmas, as many traditional retailers prepare for discounted sales in the lead up to the festive season.
Heavy price discounting in the retail industry has become the norm, according to a recent survey by Dun & Bradstreet. And businesses expect it to continue into Christmas. Consumers have become accustomed to sales and are unwilling to buy at full price.
According to the report, discounting five years ago was limited to post-Christmas sales and end of financial year periods. Long lines of customers waiting to enter David Jones Limited (ASX: DJS) or Myer Holding Limited’s (ASX: MYR) stores for their annual or semi-annual clearance sales are likely to be a thing of the past.
Consumers are more savvy these days as well, knowing that many items can be purchased online, at cheaper prices, and expect retailers to give discounts. The problem for retailers is that discounting erodes their profit margins, and many have been trying to cut out discounting as a way to get shoppers in the door.
38% of companies, out of 1200 businesses surveyed, had boosted their inventories to meet anticipated demand, while 49% expect sales to increase over Christmas. Selling price expectations have fallen over the past two years, and are now close to the lowest level in nearly 20 years. That indicates that retailers are becoming more accustomed to selling higher volumes of goods at lower marginal prices.
You only have to look at the recent profit margins reported by the likes of JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings (ASX: HVN) compared to their historical profit margins to see how discounting has hurt. JB’s reported a profit margin of 3.3% in 2012, compared to 4.5% in 2011, while Harvey Norman’s margin was 6.9%, compared to 9.4% the previous year.
The Foolish bottom line
One way for retailers to boost growth in earnings is to increase sales, even if that comes at the expense of eroding their profit margins. Increasingly that has become the norm and our traditional bricks-and-mortar stores will need to get used to it.
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Motley Fool writer/analyst Mike King owns shares in David Jones and JB Hi-Fi. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.